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  • Print publication year: 2002
  • Online publication date: June 2012

4 - MONETARY MANAGEMENT OF THE MACROECONOMY

Summary

Introduction: Motivation, the Explanandum, and a Road Map

Through the 1970s into the 1980s, economic conditions deteriorated and public debt and transfers grew dramatically, though variably across countries, increasingly reducing democratic governments' fiscal-policy options and efficacy in fulfilling their commitments to macroeconomic management. With fiscal utility narrowing, and with the Bretton Woods collapse having removed fixed-exchange-rate constraints, governments turned toward monetary policy to combat at least the inflation part of stagflation. Concurrently, the rational-expectations revolution in economic theory (Lucas 1976, 1981) suggested that they could do so at little real cost, provided monetary authorities had sufficient conservative credibility (Barro and Gordon 1983a,b). Policy makers, however far they credited these theories (Hall 1989), seized upon them to justify shifting policy-emphases toward heavy reliance on antiinflation monetary policy, trying to rebuild broad postwar coalitions behind public macroeconomic management for putative efficiency, which stagflation and seeming Keynesian policy failure had weakened. Right parties turned first, easily restructuring their support coalitions behind this new conservative orthodoxy (Hibbs 1987). The left soon followed, caught between high transfers sapping fiscal efficacy (Chapter 2), high debts constraining fiscal maneuverability (Chapter 3), and high capital mobility and flexible exchange rates diminishing Keynesian policy efficacy (Alesina et al. 1994; Garrett 1995, 1998a,b,c, 2000; Garrett and Lange 1991, 1995; Clark 2000; Clark et al. 1998; Clark and Hallerberg 1999; Oatley 1999). They too restructured economic-policy platforms and coalitions, endorsing some macroeconomic, minimally monetary, conservative orthodoxy, and adding an emphasis on public investment, especially in human capital (Boix 1998).